British companies operating in Iraq as part of the reconstruction effort have sharply cut back the numbers of people working in the country as security fears have mounted through the spate of kidnappings, attacks and the ongoing insurgencies of recent weeks.

Companies once keen to win contracts to rebuild vital power, water, communications and transport links have ditched plans to send people out and are now not likely to do so until there is a serious improvement. Those that remain often find they are kicking their heels as security problems interrupt their operations. Meanwhile, they are still paid.

The British Consultants and Construction Bureau (BCCB), a trade body representing 12 of the UK companies with employees in Iraq - including engineers and contractors Costain, Halcrow, Mott Macdonald and Black & Veatch - says that the risk to employees has caused those companies to reassess their operations and has prevented others from even considering sending their people to the country.

Graham Hand, its chief executive, says: 'I don't think there have been any new entrants [to Iraq] among infrastructure companies in the past year. Those that are there have tended to slim down where possible.'

He says there has been no 'mass exodus', but that the 'slimming' has been dramatic. 'I would say that between 25 and 50 per cent of people who were there are not there any more. There are two things that can be done - take greater security precautions to avoid their people being soft targets, and reduce the numbers to reduce the target.'

Andy Bearpark, former director of operations for the Coalition Provisional Authority in Bagdhad, now a director at Olive Security, one of the companies supplying armed protection to the contractors, says: 'There was a feeling things were getting better in August and September last year. It was probably only stable, and when you got to March, that is when things started getting very seriously more difficult. They continued to get more difficult, and will continue to do so.'

In the intervening seven months, 12 British nationals have been killed, according to the Foreign Office. With the uprisings in Falluja and Najaf, mortar attacks on the supposedly safe 'Green Zone' in Baghdad this month, the abduction and murder of Ken Bigley and the kidnapping of Maria Hassaan, the risks have grown even in the past fortnight.

Hand says: 'People are now telling me "It's not for us, we're glad we're not in there, and we wouldn't touch it".'

For those who are there, however, operations remain extremely difficult. 'People say that things have slowed down out there,' Hand says. 'In practical terms, that means people are not working with 100 per cent efficiency. They want to be working, but can't.'

Meanwhile, work coming from the spending authorities has been sporadic. They are the US Project and Contracting Office, an agency of the Department of Defence, which manages $12.6 billion of the $18.4bn reconstruction money agreed by the US Congress, and the Iraqi ministries, which now have control over funds left from the oil for food programme, oil revenues and international donations.

One major contractor, who, like most operators in Iraq refuses to talk publicly for security reasons, had said earlier this month that 'the issue of task orders [orders to carry out specific actions, such as fixing electricity wires] has been held up'. However, by last week the process was beginning to pick up, although the pace was sporadic.

According to the PCO's website, 201 out of 390 planned orders have been issued. So far $11.6bn in funds has been committed under the programmes, but only $1.2bn has been spent.

Meanwhile, major infrastructure providers point to difficulties that are emerging in relations with the Iraqi government. One group of suppliers met Iraqi Prime Minister Iyad Alawi when he visited the UK this month.

'The problem is the terms of the contracts they are offering,' one of the suppliers said. 'With the Americans these are "cost-plus" deals. With the Iraqi government, there are still risks, such as security, which the contractor has to bear. These need to be sorted out before anything gets agreed.'

More evidence of slowdown comes from UK-based insurers. On the one hand, underwriters are reporting increases in premiums for personal injury and kidnap and ransom (K&R) insurance. A spokewoman for Hiscox, one such underwriter says: 'There has been an increase in premiums and also in inquiries for K&R since the war ended. We now advise companies that they should buy both personal injury and K&R for Iraq, whereas before we would have said only one of them.'

Large insurers, however, have found a slump in demand for this business. One said: 'A year ago we thought that Iraq represented a considerable opportunity for business. But people both in the UK and Europe have told us there is simply not the work out there to justify the risk of sending people out. The work orders have been slow so we have given up trying to market the business to our clients.

'It is not just for Iraq. I have talked to people who are now wary of sending people to Saudi Arabia because of the increased risks.'

While companies have looked to follow Foreign Office advice and have scaled back operations to those that are 'essential', they still have to bear security costs, which have also risen too. Security companies agree that a former army or military police guard costs between $500 and $750 a day, but costs have spiked well above that - for example, $1,000 a day was charged by those guarding Iraqi ministers in the weeks after the handover of power on 30 June.

BCCB represents three security companies in Iraq - Olive, Control Risks Group and Aegis. Hand says these are the exception to the trend among his members; the numbers they have committed to Iraq have increased.

As he would be expected to, Bearpark, now with Olive, says demand has increased as the situation has deteriorated. While there was concern in ex-military circles in the spring that the Iraq- induced demand would fall, the bonanza for ex-soldiers continues unabated. 'We talk of between 10,000 and 20,000 security people in Iraq,' he says. 'Demand has increased.'

He adds that there is generally a good enough supply of people leaving the armed forces to fill whatever is needed, but conceded that supply is as stretched as it has ever been. There have been problems caused, for example, by Nepal's reluctance to endorse the participation of ex-Ghurka soldiers. This has economic implications for the companies. Ghurkas are what is known euphemistically as 'good value' because they have traditionally been paid less.

Contractors are only too aware of this. One official at a major company says: 'We used to talk about security costs taking up 20 per cent of the costs in a contract. That has gone up to around 30 per cent.'

For the giants, such as Halliburton subsidiary Kellogg Brown & Root, Parsons, Berger and Fluor of the US and Amec of the UK, which have prime contracts with the US Department of Defence under the six major infrastructure programmes, these costs are of accounting interest only, since they are passed on to the American government according to the 'cost-plus' basis under which deals were signed.

However, for others, they can be a significant problem. One major contractor said: 'We pass these on, but have heard of other companies which are not able to do so and have to operate with less security than they would ideally like.'

Hand says this is unlikely, but adds: 'You can't expect the redevelopment of Iraq to be subsidised out of these companies' pockets. If you arrive at a situation where the person bearing the contract will not allocate more funds to security, and the costs rise, people will think again. There is an equation.'

The message coming out now is that people are beginning to think again.

'People tell me: "If we cannot protect our people, then we will have to get out",' Hand says. 'We are closer to that than we have been before.'